RE: Response to Moderator's Q on Privatization Premise

[Richard Arsinow <richard.arsinow@rauland.com>]

Ms. Kijakazi, you made your best case for collective trust fund investment, but you did not answer the question which was asked.

Our moderator specifically asked whether, in setting up a new system where none existed before, it might be preferable to separate the retirement income needs and the insurance needs and provide for each separately and appropriately.  In other words, **neglect transition costs entirely**.  Retirement income needs, in the proposed alternative, would be prefunded by tax-deferred saving.  Insurance needs would be paid for by a small reduction in the amount available for retirement saving, and coverage would be effective immediately.

>>>>If the goals of Social Security reform include boosting national savings and raising the rate of return received on payroll tax contributions, this can be achieved without creating a system of individual accounts. A portion of the trust funds that are not needed to pay current benefits can be invested in equities to achieve a higher rate of return than Treasury securities would yield. Increasing the rate of return to the trust funds would reduce the size of the long-term imbalance and consequently reduce the amount by which benefits otherwise would need to be reduced or taxes raised.>>>>

Such action does not boost national savings by individuals, nor does it provide any incentives or assistance for individuals to increase their savings.

Raising the rate of return received on payroll tax contributions is a worthy goal, but the only possible benefit which individuals might glean from your suggestion is that their benefits won't be cut quite as much or their payroll taxes won't be raised quite as high.

What you are really saying to young people facing a negative return on their Social Security contributions is 'If we do this, then your return will still go more negative, but not as much as if we don't do it'.  That's not meaningful reform.  Meaningful reform would leave a system which is not just technically solvent for 75 years, but soundly self-funded in perpetuity.  Meaningful reform would leave a system in which all participants would receive a fair positive return on their contributions.

You spend a lot of effort dismissing individual accounts based on administrative costs, including the notion that fixed administrative costs will hurt lower-income participants.  In practice, though, virtually all mutual fund costs are on a percentage of assets basis.  In a national system of individual accounts, where investment managers would compete for the business, such costs would be strictly on a percentage basis and as low as possible, half a percent or less.  Such a system could produce a net return, after administrative costs are paid, of over 4% with conservative investment with exactly the same risk as the trust fund has now, or more with a little risk added.  Instead, you would have us perpetuate a system which promises today's young workers a guaranteed loss, because you worry about the investment risk and the administrative costs.  Those arguments just don't hold water.

Please answer the question which was asked, with no reference to transition costs.